Former Nortel Executives Face Fraud Charges in Canada Court

Three former Nortel Networks Corp. (NRTLQ) executives are in a Canadian criminal court accused of a C$5 million ($4.9 million) fraud at what was once North America’s largest telephone-equipment maker before its bankruptcy and dissolution.

Former Chief Executive Officer Frank Dunn, former Chief Financial Officer Douglas Beatty and former Controller Michael Gollogly allegedly misstated financial results between 2000 and 2004, allowing them to pocket millions in bonuses. All three pleaded not guilty as the trial began today at Ontario Superior Court in Toronto.

Prosecutors “will be proceeding on two counts of fraud against each accused” in a trial that is expected to last six to nine months, Brendan Crawley, a spokesman for the Ontario Ministry of the Attorney General, said in an e-mail before the trial began.

Prosecutors will set out their “case in court on the record, and won’t be making any comment before then,” Crawley said in the e-mail.

The accused opted for a trial without a jury and they could face maximum sentences of 14 years. The judge in the case is Frank Marrocco, the former prosecuting attorney in Canada’s biggest stock-market scandal, the Bre-X Minerals Ltd. (BXM) gold- discovery hoax. In that case, the only executive brought to trial was acquitted in 2007.

Charges From 2008

The charges made in 2008 against the Nortel executives concern earnings statements showing the company returned to profit in 2003 following losses in 2001 and 2002 amid the global technology stock crash. Nortel’s board fired the executives in 2004 after an internal investigation of the company’s financial reporting. It then restated earnings back to 1999.

“The last quarter of 2002 and the first quarter of 2003 is really the focus” of this case, Brian Greenspan, the former controller’s lawyer, said in a telephone interview last week. “We’ve always maintained that Michael Gollogly didn’t engage in any wrongdoing whatsoever.”

Messages seeking comment last week from Dunn and Beatty at their law firms, McCarthy Tetrault LLP and Lafontaine & Associates Inc., respectively, weren’t returned.

Nortel filed for bankruptcy in January 2009 after reporting $11.6 billion in consolidated assets against $11.8 billion in debt as of Sept. 30, 2008. The company has since sold its business units for at least $7.5 billion, including the $4.5 billion sale in July of its patent portfolio to a group that includes Apple Inc. (AAPL) and Microsoft Corp. (MSFT)

Livent Case

Former Livent Inc. theater producers Garth Drabinksy and Myron Gottlieb ended up with sentences of five and four years, respectively, after being convicted of falsifying financial statements from 1989 to 1998 while they sold shares, warrants, debentures and senior notes valued at C$460 million.

“We’re just being completely ineffective in how we tackle white-collar crime in Canada,” David Hutton, executive director of Fair Accountability Initiative for Reform, an Ottawa-based whistle-blower advocacy group, said in a telephone interview. “Nortel is a classic example because it’s taken ages.”

The case is between Her Majesty the Queen and Dunn, Beatty and Gollogly, 1000145, Ontario Superior Court of Justice (Toronto).

To contact the reporter on this story: Colin McClelland in Toronto at cmcclelland1@bloomberg.net

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net

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